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Economic Expansion Expected to Decelerate in Second Half of 2017

Wednesday, July 19, 2017 6:40 AM

Expectations for 2017 economic growth remain at 2.0 percent amid a projected second half slowdown, according to the Fannie Mae Economic & Strategic Research (ESR) Group's July 2017 Economic and Housing Outlook.

With the expansion having entered its ninth year, incoming data point to a second quarter economic growth rebound of 2.7 percent annualized, up from 1.4 percent in the first quarter. However, the full percentage point rise in the saving rate since December signals increased caution among consumers, despite elevated consumer confidence. Decelerating corporate profit growth, commonly seen in the late stages of an expansion, presents a challenge to business investment that is compounded by tax policy uncertainty.

In addition, residential investment will likely contribute less to second-half growth due to lackluster homebuilding activity and tight for-sale inventory that is restraining home sales. Consequently, second-half growth is expected to slow to 1.9 percent. Moderate growth is expected to continue in 2018, with potential changes to fiscal and monetary policy posing both upside and downside risks to the forecast.

"While second quarter growth is poised to rebound, we expect growth to moderate through the remainder of 2017," said Fannie Mae Chief Economist Doug Duncan. "Consumer spending, traditionally the largest contributor to economic growth, is sluggish and is lagging positive consumer sentiment and solid hiring. While labor market slack continues to diminish, wage growth is not accelerating and inflation has moved further below the Fed's target. These conditions support our call that the Fed will continue gradual monetary policy normalization, announce its balance sheet tapering policy in September, and wait until December for additional data, especially on inflation, before raising the fed funds rate for the third time this year."

"Construction activity has lost some steam following the first quarter's weather-driven boost," Duncan continued. "Meanwhile, very lean inventory continues to act as a boon for home prices and a bane for affordability, particularly among potential first-time homeowners. According to our second quarter Mortgage Lender Sentiment Survey, lenders expect to ease credit standards further. However, we continue to project that the pace of growth in total home sales will slow to 3.3 percent this year, as we believe rapid home-price gains amid scarce supply will remain a hurdle for potential homebuyers despite improvements in credit access.